A Double Top for CBA’s Share Price?

What happened to the market yesterday? After starting the day on a positive footing, the ASX200 lost ground, with the selling pressure picking up in the afternoon. China and the banks were the culprits.

But it’s the banks that contributed to the bulk of yesterday’s selling. Investors are again asking, have the banks seen their best days?

We’ve been pondering this same question in the reports we send to Sound Money. Sound Investments subscribers. Specifically, we’ve been asking when the interest rate sugar fix will wear off on interest rate sensitive sectors like housing and the banks. Because when it does, asset prices will head south.

We hope our readers won’t mind if we share a few charts with you to show you what’s going on. Firstly, our premise is that the Reserve Bank of Australia’s rate cutting cycle, which saw the cash rate fall from 4.75% in October 2011 to 2.5% in August 2013, boosted all asset markets. Importantly though, we contend that the boost was temporary.

Here are two charts that support our contention. Firstly, there’s Mortgage Choice [ASX:MOC], Australia’s largest listed mortgage broker. It peaked in October last year and is now starting to trend lower. This chart tells you that the housing boom could be over.

Mortgage Choice’s best day are behind it

The next chart is slightly more complex. It’s representative of Australia’s finance based economy and provides important clues as to what’s going on in the economy.

It’s a chart of the Commonwealth Bank [ASX:CBA], Australia’s largest bank. It’s a weekly chart (which helps to cut out lot of the noise that occurs with daily volatility) spanning the past two years. On Tuesday it attempted to breach its October high, only to sell off immediately. While the stock looks like it’s in a solid uptrend, there are some ‘internal’ warning signs.

Here’s what we wrote to our subscribers last week:

‘..if you look at the price chart of the CBA below, you see a stock price in a strong uptrend making an attempt at the old highs. But if you look below the share price, you can see some warning signs. Both the relative strength index and the MACD index have trended lower over the past year, and volumes (the lower panel) have really dropped off with this latest rally. That’s not an encouraging sign.

‘This has all the makings of a double top. Let’s see what happens in the next few weeks, but if Australia’s financial bellwether can’t sustain new highs, then I doubt that the market can either.’

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